“I believe that business has the responsibility to be in service to social, environmental and economic justice - one way to do that is to design equity into the financial systems up front so that they create the space for thrival, not just survival.”

Sometimes it’s helpful when you’re trying to figure out what something is to define first what it isn’t.

What are CFO services exactly? What is financial operations management? What exactly is it that you do Monique?

Here’s what I don’t do.

I’m not a bookkeeper. They keep the books. They track and record the day-to-day transactions in QuickBooks or Zero or some such accounting software. They make sure the bills get paid and the customers pay up. As a virtual CFO, I use the financial statements that bookkeepers produce to analyze past performance and provide assumptions for future planning.

I’m not a CPA (Certified Public Accountant) or an EA (Enrolled Agent). These folks are tax preparers and know how to produce income tax returns and to give tax advice. I shudder to think of the continuing education CPAs and EAs need to go through to stay on top of the IRS and its changing regulations. I work with tax professionals to structure the business to the owners best advantage.

I’m not a financial planner. Those folks are great for giving you advice on what to do with the money–that I help you make–that you want to invest for your retirement, kids college and such. I help the business owner make the money to invest in their future.

I’m not a business coach. They provides positive support, feedback and advice to improve personal effectiveness in the business setting, according to Wikipedia. I work with business coaches to help the business owner move forward.

I’m not a financial therapist. Bari Tessler, financial therapist par excellance says: “I describe this work as integrating deep psychotherapeutic training with practical skills, tools, and financial training.” I work with financial therapists to support the business owner put the insights they gain into practice.

If you think of all these different roles as being players in an orchestra, then I am the conductor. These different roles are all connected to each other and the business owner. If they aren’t overseen and synced, then the left hand doesn’t know what the right hand is doing. Some functions can get done twice and others not at all.

Financial operations management and CFO services makes sure that the books are being kept in a format that provides the owner with information on which to base decisions, and gives the tax preparer accurate information to file the tax returns and give advice. It means preparing budgets and forecasts and business plans. It means securing loans and line of equity from banks. It means helping struggling companies turn themselves around.

Money flows to every part of your business. Every part. And having a virtual CFO on your team ensures that the entire picture is being looked after. Seen and overseen and responded to.

If you feel like it’s impossible to hit the mark when it comes to your financial operations, then it’s time to make some changes. It’s not impossible, it just requires a thoughtful, customized approach. That’s where I come in.

Equity By Design offers you expertise equal to a full time CFO at a fraction of the cost. Let’s have a chat about how I can turn your business around, even out your cash flow, and double your profits. Guaranteed.

I’m guessing that if you’re interested in getting your company “investor ready” it’s because you are looking for outside cash.

There are many reasons a viable company needs outside cash:

You need to purchase equipment to expand your business.

Your business is profitable, but you need to even out periodic negative cash flow.

You want to sell the company.

You want to attract top-notch key employees.

You’re a start up and need to raise capital.

While these reasons are different, they all have one thing in common: your company needs something from the outside. It’s your job, with the help of your CFO, to provide those potential sources of cash with the information they need in the way that they want it. You have to show them that you know what you’re doing. It helps to talk their language.

What you need to have in place to call yourself “investor ready:”

a solid finance and accounting team

full charge bookkeeper to handle the day-to-day operations and record-keeping in a complete, accurate and timely way

a tax preparer (CPA or EA) to file accurate tax returns in a timely fashion and to give you tax advice

a CFO to oversee all the financial operations and coordinate between the bookkeeper, the CPA/EA, you, and the bank or investors

documented business processes in the form of an Operations Manual

job descriptions

processes

procedures

a solid accounting system

pick a system you can grow into so that you have your financial and accounting history in one system.

a vision for the future, i.e., business plan

Marketing plan

Financial projections

income and payroll taxes filed on time

current, complete, and accurate financial reports

key management positions filled with experienced people, either as staff or consultants.

In fact, these best practices apply to all businesses, no matter what their exit strategy, how long they’ve been in business, or how many employees they have. However, not all business put in the effort to put these in place. That’s why some businesses fail in the first five years, some struggle, and some fail to thrive. But if your business wants to grow and needs cash from an external source, then these are essential for success.

There are two ways to get the cash you need to scale your business: debt or equity.

Debt financing: This is about borrowing money and repaying it with interest.

Equity financing: This is about selling shares of your business, thereby cutting investors in on the ownership of the business, and sharing the profits.

There are pros and cons to each. What it all comes down to is what’s the best deal you can negotiate at the time you need the money and with whom. As the fabulous Annie Savoy said in Bull Durham, “…it’s all a question of quantum physics, molecular attraction, and timin’.”

Types of investors:

Friends & family

Partners

Banks and credit unions

Angel investors & venture capitalists

Philanthropic foundations

Community investment funds

Accelerators & incubators

Let’s talk here about #3, banks and credit unions. I’ll cover the others later in other posts.

Banks, where your debt financing will come from, are more risk-averse than investors. And they rely more on your history of past performance and what assets you have to put up as collateral. This is also cheaper money than compared with what you’d get from an angel or VC; those types of investors want an ownership interest and a large return on their money. This is a good solution when you have collateral and a profitable business.

Banks want collateral up the wazoo. And if you don’t have collateral in the business, like equipment or real estate, they want a personal guarantee from the owner(s) using their personal assets, like the house.

Banks and credit unions are the best source of cash when you have collateral. Investors serve a different purpose and I’ll talk about them next week.

What your CFO does is provide the financial information the bank needs in the format the bank wants it in. For starters, they will want to see your tax returns and financial statements for the prior 2-3 years, budget and cash flow projections for the next 2-3 years, and a bunch of other supporting data (previous job history, personal assets, spouse’s income and assets, etc.)

In order for you to provide them with your tax returns, you have to have filed them, which means you have to have prepared them, which means you have to have an accounting system in place and a bookkeeper to have tracked the data. Your CFO is the best person to coordinate and direct this process.

When you’re looking to get your business “investor ready” I can help. Got questions? Pop ’em into the comments below and we’ll get ‘her done! And remember: there are no stupid questions. Never.

As my financial management teacher in B-School would drill into us mission-driven social entrepreneurs, “If you don’t have a viable business, it doesn’t matter how much good you want to do in the world; you’ve got to be sustainable.” And the fastest way to unsustainable is to run out of cash.

What’s the best way to track your cash?

Why an Excel spreadsheet, of course. I can count on one hand the number of times an Excel spreadsheet is a good idea and this is one of them.

What you’re tracking is the timing of cash coming in and going out.

Here’s how to create a cash flow projection:

Make a list in column A of all your expected receipts and in column B put the date of the month that will fall on.

Order this list by the date of the expected receipt or transaction.

Make columns for each month for the next twelve months. The amount goes into the appropriate month.

Start this list with your the balance as shown in your check register.

Here’s what I’m talking about:

due date

Jun-17

Jul-17

Aug-17

book balance as of:

6/27

7,607.51

7,516.51

10,566.51

office rent

1st

(150.00)

(150.00)

AR – PAFM

5th

500.00

AR – TTM

10th

4,500.00

Owner Draw

15th

(1,500.00)

(1,500.00)

AR – GDM

25th

4,500.00

AmEx 3000

28th

(91.00)

(300.00)

(7,000.00)

7,516.51

10,566.51

6,416.51

A couple of things I want point out:

The “book balance” in the balance in your check register. It is NOT the cash balance in your bank account as shown by the bank on their website. The book balance is critical to get right here because the cash flow projection is all about timing.

Because this is about actual cash going out, whatever you charge on your credit card does not get listed on the cash flow. Only the amount that you are going to pay on your credit card goes on the cash flow. My AmEx earns miles on Delta, so I charge whatever I can onto that card. That’s why in this example you don’t see my cell phone or restaurant charges and such.

Why maintain a cash flow?

Cash flow is all about two things: when the cash comes in and out, and how much cash goes in and out of your checking account. That’s it. Projecting out your future cash flows will expose exactly when you might run into a negative cash position. Let’s take a look at the same example, with one difference: the beginning book balance.

due date

Jun-17

Jul-17

Aug-17

book balance as of:

6/27

495.01

404.01

3,454.01

office rent

1st

(150.00)

(150.00)

AR – PAFM

5th

500.00

AR – TTM

10th

4,500.00

Owner Draw

15th

(1,500.00)

(1,500.00)

AR – GDM

25th

4,500.00

AmEx 3000

28th

(91.00)

(300.00)

(7,000.00)

404.01

3,454.01

-695.99

Given this scenario, you can clearly see that I’ll run out of cash at the end of August. So something’s got to change. And I have a few options. I can decrease my Owner Draw, or I can reduce my AmEx payment in August, or I can bring in more sales, or any combination thereof.

There are three reasons why you might find your business in a negative cash position: timing, volume, or unprofitable business model.

If it’s a timing thing, you have lots of control over when you incur expenses and when you pay them. For example, Paul runs a Christmas tree farm and, as you would expect, all his sales come in December of the year. He brings in a net operating profit for the entire year, so he looks great on paper, it’s just that cash comes in all at once. So he keeps enough in reserve to tide him over from January through November and a cash flow projection helps him do that.

If it’s a volume thing, you just need to bring in more sales to cover your costs. Easier said than done, but it’s a pretty straightforward marketing problem.

If it’s a profitability thing, that’s a bit more serious. It means that no matter how you futz with the timing, you’ll run out of cash eventually. It means that your costs are more than what you bring in on each thing that you sell. That’s when a turnaround is in order because the business model needs to be changed so that your product or service is profitable #1, and that you have the volume needed to throw off enough profit to be a sustainable business #2.

Cash flow projection vs. Statement of Cash Flows:

These are NOT the same thing by any stretch. A cash flow projection is created and maintained outside of your QuickBooks accounting software on an Excel spreadsheet and is all about timing and amounts of FUTURE cash inflows and outflows.

A Statement of Cash Flows is generated inside of your QuickBooks and is about the PAST sources and uses of cash. This is a report that you most likely will very rarely use unless you deal with outside investors and debt. Then this is an important analysis tool to see where your money comes from (revenue or debt) and where it goes (operations or financing the debt.)

Want some help constructing a cash flow projection for your business? Hit me up with your specific questions in the comments below and let’s get you going.

The first metric you should be looking at when you review your monthly Profit & Loss Statements is “percentage of income.” This is the one to keep your eye on. So powerful.

What is “% of income?” It’s the percentage of each category of cost and expense as measured against the gross income.

This one metric can help you analyze past performance:

current period against itself

current period against prior periods

current period against budget.

individual products and service profitability

It can also help you construct future strategy:

budget

pricing structure

investment needs

In this article, I’ll talk about #1 and #2.

How to calculate it:

The income referred to here is Gross Income, the amount that you receive from your clients and customers for your services and products. (Also referred to as Gross Revenues and Gross Sales, same thing.)

Think of your Gross Income as the 100%. Every other cost and expense on the P&L is divided into the gross income to come up with a percentage, hence the name, percentage of income.

For example, this here below is the P&L for a consulting company.

Jan – Dec 2015

Current

% of Income

Income

INCOME

55,109

100%

Expenses

1 – SALES EXPENSES

3,204

6%

2 – MARKETING EXPENSES

2,808

5%

3 – T&E EXPENSES

5,934

11%

4 – G&A EXPENSES

9,553

17%

5 – CONTINUING EDUCATION

18,090

33%

6 – WEBSITE EXPENSES

119

0%

Total Expenses

39,707

72%

Net Operating Income

15,401

28%

I like to start by looking at the big picture first, then drilling down to the details. Start with the bottom line, at the “net profit %.” That’s another name for “Net Operating Income %.” Here it’s 28%. That means that for every dollar brought into the business in revenue the business made $0.28 in profit.

Next, I look at the different types of expenses and see what % of income those were.

Now, information about one accounting cycle is informative, but the beauty of this metric is fully revealed when you use these percentages in comparison to other periods.

Jan – Dec 2015

Jan – Dec 2016

Current

% of Income

Current

% of Income

Income

INCOME

55,109

100%

49,696

100%

Expenses

1 – SALES EXPENSES

3,204

6%

15,365

31%

2 – MARKETING EXPENSES

2,808

5%

3,000

6%

3 – T&E EXPENSES

5,934

11%

752

2%

4 – G&A EXPENSES

9,553

17%

6,756

14%

5 – CONTINUING EDUCATION

18,090

33%

2,284

5%

6 – WEBSITE EXPENSES

119

0%

369

1%

Total Expenses

39,707

72%

28,527

57%

Net Operating Income

15,401

28%

21,169

43%

Now the fun starts. All kinds of questions come up and the answers will inform you on two fronts: by tracking your actuals to see how you actually performed and by giving you information you can use to make changes to set and hit your future targets.

Income was down in 2016, but net profit was up. What? Why was that? Continuing Education, for coaching, were way down in 2016. That explains it.

My next question for the owner to answer would be: Sales were down 10% in 2016 over 2015. Did the lack of coaching have anything to do with that? Had you continued with the coaching do you think you would have increased your sales? Or did that make no difference? The answer to this question will then open up new avenues of questions.

If they think that lack of coaching negatively impacted their sales, what would their sales numbers need to be in 2017 to both get coaching and maintain a 43% net profit margin? $77,231 is what. So now they have a target number for your income budget should you want to continue coaching in 2017.

This is how using this one metric, the % of Income, can both help you analyze your past performance AND help you set your future budgets and targets.

We’ve only scratched the surface of the questions and analysis possible with this one metric. There’s plenty more to come, such as comparing “budget to actuals” and constructing a pricing structure for products and services.

Shoot me any questions and comments and I’ll be happy to address what’s up for you.

The term, getting to scale, means that your business is on its way to becoming financially stable. On its way, not there yet. And how do you know you are on your way?

Your business model is profitable.

You have your goals clearly identified.

You track your performance against your goals and adjust accordingly.

It’s really that simple. Easy to execute? No. Simple? Yes.

Once you get to scale and have reached a financially stable size, you can stay there if you want.

If, on the other hand, you want to compete with bigger businesses, make a whole lot more money, and/or make an impact, then you want to scale up.

But first you have to get to scale.

Every business, from the solopreneur who does everything herself to the seasoned CEO with 10 employees relies on the same Generally Accepted Accounting Principles (GAAP), on the same tax codes, and on the same financial strategy challenges.

And whether your business generates $100,000 in top-line revenue or $1MM, sound strategy and implementation are the keys to success.

Understanding the financial management piece of running your company is crucial.

If you’re in business at all, it’s because you are good at what you do. But you may not know the nuts and bolts of financial management. Not to worry…it’s all learnable.

So tell me, what are your current frustrations and challenges on your road to getting to scale? Hit me up here and let’s get your questions answered.

They are physical things that support you in making change (which is what you are doing right now by learning new concepts about your financial operations.)

Swaddling babies calms down their nervous system and gives them a sense of security.

Dog parks give dogs a sense of security because they know the boundaries of their territory.

Timers gives you a start and a stop time so you have a sense of completion. Most projects take longer than 25 or 45 minutes to complete. But by chunking a large project down into smaller, doable steps you get a sense of containment, of managabity. That something is do-able.

This week I want to share with you some resources that will contain the energy of “overwhelm” and turn it into “on purpose.”

Sometimes I go a little overboard – creating a more complicated routine than necessary.

Here are 3 resources for you to help you move forward! Use them, love them, share them and let me know how you like them!

Whitney Bishop: Make 3 Changes – change doesn’t have to be “all or nothing,” in fact, making small, steady, consistent changes over time may just be the ticket.

The Pomodoro Technique – a time blocking technique that I have adapted with GREAT success! LOVE this. Hope you do, too! This one thing alone has made a hugh difference in my life.

Amy Cuddy – Power Poses – Amy’s TED talk about how adopting a pose for 2 minutes can change your physiology is just stunning! Such a simple, quick thing has powerful results. I’m a fan ’cause it works.

If I can be of service or if you want to take me up on my offer to support you, LET ME KNOW! I love serving those who serve others. Just grab a spot on my calendar and let’s make it happen!

I just got off the phone with one of the solopreneurs who grabbed a seat in my upcoming coaching program about doing your own books using QuickBooks Online. And she had a great comment–so I wanted to pass it on to you.

“I know I’m really good at doing what I do. But I don’t know what I don’t know about the back-end of it, the financial admin and ops side of things.”

Wow! That’s a great insight and the beginning of wisdom and mastery.

So here’s my answer based on what I have seen over the years working one-on-one with clients and in my group programs on bookkeeping and accounting.

They commingle funds by running personal transactions through their business bank accounts and visa versa. This not only muddies the waters, it opens them up to unnecessary scrutiny should they get audited. (I’ll show you how to clean that up.)

They don’t understand the difference between cash and accrual basis or why it’s even important. (I’ll teach you that.)

They haven’t set up a budget, what I call a “financial vision board,” to help them track their progress and dream big. (I’ll show you the ins and outs.)

They don’t know what to do on a daily, weekly, monthly, quarterly and annual basis to establish peach of mind thru a consistent workflow. (I’ll teach you how to set up the systems and checklists to do just that.)

They don’t know what deductions to take that they are actually allowed and they take deductions that they aren’t allowed. (I’ll explain all this in clear English, not IRS babble.)

They don’t look at their numbers at all, they just compile them once a year—usually the weekend before April 15th—to do their tax returns. (I’ll teach you how to review your financial reports on regular basis so you know what to look for.)

Anyway, I hope this resonates with you. It’s super important. After all, your WORK is important. Your financial operations should be supporting you, not draining you.

I’m offering a special coaching and training program specifically designed for solopreneurs. It’s all about learning how to set up and maintain your own complete bookkeeping system using QuickBooks Online Plus. I will walk you through the before, during and after of running your own set of books.

And not only that, it’s about learning how to understand what the numbers mean and what to look for once you’ve got good financial reports to look at.

All you have to do is send me an email to monique@equitybydesign.com and let me know you’re interested in finding out more. I will write you back and give you the details.

A client sent me this email recently: Will I need a 1099 FROM (emphasis added) a vendor I paid money to?

No. Your business doesn’t NEED 1099s from other vendors. It needs to send 1099s TO vendors (with some exceptions) that your business has paid $600 and over to.

There are exceptions. What kind of rule would that be without exceptions?

Did you pay under $600? No 1099.

Did you pay over $600 on a credit card? No 1099.

Did you pay a vendor with “Inc.” in its name? No 1099.

Did you pay over $600 not on a credit card to a person, e.g. Monique Lusse? Yes 1099.

Did you pay over $600 not on a credit card to a company name, e.g.: Equity By Design? No 1099.

1099s are the IRS’s way of keeping us all honest. A check made out to a person’s name is easy to hide from the IRS and they want to know about those. So if you made a check out to me, Monique Lusse, I could go to your bank and cash the check, not declare that income on my Schedule C and the IRS would be none the wiser. So that’s why you should send a 1099 to anyone you wrote a check or ACH transfer to. Now if you send me a check made out to my business, Equity By Design, I cannot go to your bank and cash it. That’s against banking rules. So the IRS is not so concerned that I’ll be able to “shelter” that income from them. That check has to be deposited to my business account, hence an audit trail, which the IRS loves.

Your business will receive 1099s from other businesses that you have done busines with over $600. You just need to archive them. That’s it. No other action needed.

The deadline for 2015 1099s to vendors was 1/31/16. The deadline to send the 1099 info to the IRS via snail mail was 2/29/16. You should still send them now if you need to. Exception: the deadline date to send to the IRS is coming up, 3/31/16, if you do so electronically. Another exception to keep us all on our toes! So you can still make it if you need to.

Have a question about this? Throw it up in the comments section and I’ll get you an answer!

A frequent question that new business owners ask is some variation of this: Finally getting serious about tracking inflow / outflow. Bookkeeper? Quick books? Quicken? All insight appreciated. Do your books yourself or have a someone else do it?

There’s a very narrow window where it makes sense for a business owner to do their own books; it depends on your business model, your industry, your attention to detail, and your interest. And the fewer moving parts the better.

Here’s the narrow window: soloprenuer, no payroll, no inventory, cash basis, service-based. If you meet all of these criteria AND you have the discipline and interest in the consistent, detailed work, then I say, give it a go.

The minute you start getting into payroll, even if it’s just for yourself, you need outside expert help. The ways that payroll reporting and tax compliance can be screwed up are legion and just too costly to even consider doing yourself. I don’t care what marketing QuickBooks does saying that their payroll service is easy, it’s just not.

If you have any kind of inventory, either because you manufacture a product or are a reseller, this kicks you into having to do your accounting on the accrual basis to comply with the IRS. Accrual is complicated and if not done right (and it’s usually not done right by beginners) gets you into more costly trouble to have an expert sort out.

If you are in the trades, say a building contractor or plumber, then you need to track time and costs against specific jobs…and again, that adds a layer of complexity that if done incorrectly, will cost you big to untangle.

QuickBooks, not Quicken for sure.

If you fall into the narrow criteria I’ve mentioned, you might be interested in the online class I’m teaching called “Financial Fundamentals for Soloprenuers: DIY QuickBooks Online Plus.” Want more info? Ping me on monique@equitybydesign.com and we’ll see if it’s a good fit for you. Next class starts in February.

A friend, collegue and client (I just love when they’re all rolled into one!) recently asked me:
How do I know when I need to issue a 1099 for a vendor? So far I have a VA who is working project based (and has other employers) and invoices me for services provided. What about an accountant or bookkeeper?

Here’s my response to her: You’ve asked a really important question about the 1099s.

To answer that you need first to get a Form W-9 from them. Up front. Before you pay them a dime. And if you didn’t get one up front, get one NOW.

The W-9 is an IRS form that tells you whether they are 1099 material or not. Download the form here, send it to every vendor you work with, and make completing it a requirement before they get paid from you. This needs to be part of your onboarding process with any new vendor from this point on. Before they get paid, they have to send you a completed W-9. Otherwise, it can be like pulling an elephant through a knothole to get a W-9 after the fact in January 2016, as 1099s are due to vendors by 1/31/16 and the IRS by 2/28/16.

The second thing is to read Nolo Press’s information on which of your vendors meet the criteria to get a 1099, ’cause not all of them do. Nolo does such an excellent job of laying it out, please go straight to the horse’s mouth for the deets. It’ll also tell you how to file the 1099s with the IRS. Nolo rocks!

I’ll tell you another reason to get W-9s from each of your vendors: you’ll get a better idea of who might really be considered an employee rather than an independent contractor. But that’s a whole other post!